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C.I.T. v. M/S Mentha Allied Products (P) Ltd, New Delhi. - INCOME TAX REFERENCE No. 173 of 1989  RD-AH 1815 (3 August 2005)
INCOME TAX REFERENCE No. 173 Of 1989.
The Commissioner of Income-tax, Lucknow. Applicant
M/S Mentha Allied Products (P) Ltd, New Delhi. Respondent.
Hon'ble R. K. Agrawal, J.
Hon'ble Rajes Kumar, J.
( By Hon'ble Rajes Kumar, J)
At the instance of the Revenue, the Income Tax Appellate Tribunal, New Delhi has referred the following question of law under section 256 (1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") relating to the Assessment Year 1982-83 for opinion to this Court.
" Whether on the facts and in the circumstances of the case, the Tribunal was in law justified in holding that the assessee company is entitled to deduction under section 80HHA of the Income-tax Act, 1961 in respect of duty draw back?"
Briefly stated the facts giving rise of the present Reference are as follows.
The assessee-opposite party (hereinafter referred to as "the assessee") enjoys income from purchase and sale of industrial mentha oil in the head office set and manufacture and sale of basic drugs in the branch set. The assessee claimed deduction under section 80 HHA of the Act. The income-tax Officer held that the assessee company fulfilled the conditions for allow-ability of the claim under section 80HHA of the Act in respect of its pharmaceutical Division. In other words, he accepted that the assessee was an industrial undertaking as referred to in section 80HHA of the Act. He further noted that the words used in section 80 HHA of the Act are "derived from and not attributable to". According to him the meaning of term derived is narrower than the meaning of the term attributable to. Therefore, deduction under section 80 HHA of the Act was available on the actual profit of the industrial activities of the industrial undertaking and not from any incentive received from the Government because the Government wanted to boost certain industrial activities within the State. One such incentive was the duty draw back, which was included in the total income of the assessee for the assessment year under consideration. The Income-tax Officer did not allow the deduction under section 80 HHA of the Act with reference to such profits, as the same were not derived from the industrial activity. On appeal, the Commissioner of Income Tax allowed the claim of the assessee.
The Revenue aggrieved by the order of the Commissioner of Income Tax (Appeals), Bareilly preferred an appeal before the Tribunal. The Tribunal relying upon the judgment reported in 143 ITR 590 held that the income from duty draw back was directly derived from the undertaking and, therefore, entitled to deduction under section 80HHA of the Act. The question that requires answer, therefore, is whether the income from duty draw back included in the gross total income of the assessee is derived from a small-scale undertaking as envisaged under section 80 HHA of the Act.
We have heard Sri Shambhu Chopra, learned Standing Counsel for the Revenue and Sri Vikram Gulati, learned counsel for the respondent assessee.
Learned Standing Counsel submitted that the duty draw back cannot be included in the profits and gains for the purposes of allowing the deduction under section 80HHA of the Act as Section 80 HHC of the Act contemplates profits and gains derived from small-scale undertaking which does not include any incentive or duty draw back under the Government Scheme. In support of his contention, he relied upon the decision of the Apex Court in the case of Commissioner of Income-tax Versus Sterling Foods reported in (1999) 237 ITR 579, the decision of the Delhi High Court in the case of Commissioner of Income-tax Versus Ritesh Industries Limited reported in (2005) 274 ITR 324, Division Bench decision of this Court in ITR No. 45 of 1988 M/S Khan International Exports (P) Ltd, Varanasi Versus CIT, Range, Allahabad decided on 6th December, 2004 and the decision in ITR No.107 of 1997 Commissioner of Income-tax Versus M/S Himalaya Cutlery Works, Moradabad.
Learned counsel for the assessee submitted that the duty draw back under the Central Government Scheme is an reimbursement to the exporters of the duty paid on the imported raw materials and intermediates and Central excise duties paid on domestically produced inputs which enter into export production and the goods manufactured out of it is exported out of Country. He submitted that the duty draw back in fact intended to reduce the costs of production. Hence is an integral part of the pricing of the goods and, therefore, part of the cost of production of the industrial undertaking and thus be treated as "derived from" the industrial undertaking. He submitted that in the case of Commissioner of Income-Tax Versus India Gelatine & Chemicals Ltd. (Guj) reported in (2005) 194 CTR 492, the Division Bench of the Gujarat High Court has allowed the deduction on the duty draw back.
Section 80 HHA of the Act reads as follows:
" 80HHA. (1) Where the gross total income of an assessee includes any profits and gains derived from a small-scale industrial undertaking to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty percent thereof.
From a reading of the aforesaid section, it is seen that in order to qualify for deduction under section 80 HHA of the Act emphasis is on the profit derived by the assessee from export of such goods. The word "Profit derived from export of goods" came up for consideration before the Apex Court in the case of Commissioner of Income-tax Versus Sterling Foods (supra), the Apex Court was considering the question as to whether the amount received from the sale of export entitlement can be said to be profit derived from business of export of goods. The Apex Court has held that the amount received from sale of import entitlement could not be said to be profit derived from assessee's industrial undertaking. The Apex Court has held as follows:
"The word "derive" is usually followed by the word "from" and it means: "get, to trace from a source; arise from, originate in, show the origin or formation of". The source of import entitlements could not be said to be the industrial undertaking of the assessee. The source of the import entitlements could only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements became available. There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus was not direct but only incidental. The industrial undertaking exported processed sea foods. By reason of such export, the Export Promotion Scheme applied. Thereunder, the assessee was entitled to import entitlements, which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain derived from the assessee's industrial undertaking. The receipts from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under section 80 HH of the Income-tax Act, 1961."
The Delhi High Court in the case of Commissioner of Income Tax Versus Ritesh Industries Limited (supra) while following the decision of the Apex Court in the case of Commissioner of Income-Tax Versus Sterling Foods (supra) has held that the duty draw back is not an income derived from industrial undertaking. Even though, under clause (iii-b) of Section 28 of the Act, cash assistance (by whatever name called) which is received by an assessee against exports under any scheme of the Government of India is treated to be the income chargeable under the head "Profits and gains of business or profession", yet it does not partake the character of "profits derived from export of goods" as envisaged under Section 80 HHC of the Income-tax Act, 1961. Thus, the incentive would not qualify and cannot be included for determining the deduction under section 80 HHC of the Act. This Court in ITR No. 45 of 1988 M/S Khan International Exports (P) Ltd, Varanasi Versus CIT, Range, Allahabad decided on 6th December, 2004 in which one of us (Hon'ble R.K. Agrawal, J) was a member had taken the same view. It is held as follows:
"So far as question as to whether the amount of cash incentive, duty drawback and premium entitlement received by the applicant can be included in the ''export turnover' and deduction under Section 80 HHC of the Act was available or not is concerned, it may be mentioned here that the aforementioned amount has been paid by the Government to the applicant under the ''export promotion policy' of the Government of India and therefore, it will not form part of the export turnover and deduction under Section 80HHC is not available on such portion of the income."
In ITR No. 107 of 1997 Commissioner of Income-Tax Versus M/S Himalaya Cutlery Works, Moradabad decided on 5th July, 2005, this court held that the incentive received by the assessee shall not form part of the export turnover and held not entitled to relief under section 80 HHC of the Act.
Section 75 (1) of the Customs Act, 1962 contains the following scheme of duty draw back:
"75. Drawback on imported materials used in the manufacture of goods which are exported.- (1) where it appears to the Central Government that in respect of goods of any class or description manufactured in India being goods which have been entered for export and in respect of which an order permitting the clearance and loading thereof for exportation has been made under section 51 by the proper officer a drawback should be allowed of duties of customs chargeable under this Act on any imported material of a class or description used in the manufacture of such goods, the Central Government may, by notification in the Official Gazette, direct that drawback shall be allowed in respect of such goods in accordance with, and subject to, the rules made under sub-section (2)"
Similar provisions are there in section 36 of the Central Excise Act, 1944. The aforesaid provisions of the duty drawback appears to be under the export promotion policy of the Government of India provided as incentive to encourage export. These incentives may be attributed to the profits and gains but cannot be treated as a profit derived from the industrial undertaking as interpreted by the Apex court in the case of Commissioner of Income-tax Versus Sterling Foods (supra).
The decisions of this Court in the case of M/S Khan International Exports (P) Ltd, Varanasi Versus CIT and CIT Versus M/S Himalaya Cutlery Works, Moradabad are in conformity to the ratio laid down by the Apex Court. Thus, we are of the opinion that the duty draw back received by the respondent assessee cannot be treated as profits derived by the respondent assessee and therefore, not entitled to relief under section 80HHA of the Act.
Respectfully, we do not agree with the decision of the Gujarat High Court in the case of Commissioner of Income-Tax Versus India Gelatine & Chemicals Ltd (supra).
In view of the foregoing discussions, we answer the question referred to us in the negative i.e. in favour of the Revenue and against the assessee. However, there shall be no order as to costs.
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